ENERSYS The following discussion and analysis of our results of operations and financial condition for the fiscal years endedMarch 31, 2020 , 2019 and 2018, should be read in conjunction with our audited Consolidated Financial Statements and the notes to those statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, opinions, expectations, anticipations and intentions and beliefs. Actual results and the timing of events could differ materially from those anticipated in those forward-looking statements as a result of a number of factors. See "Cautionary Note Regarding Forward-Looking Statements," "Business" and "Risk Factors," sections elsewhere in this Annual Report on Form 10-K. In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered "non-GAAP financial measures" under theSEC rules. These rules require supplemental explanation and reconciliation, which is provided in this Annual Report on Form 10-K.EnerSys' management uses the non-GAAP measures, EBITDA and adjusted EBITDA, in its computation of compliance with loan covenants. These measures, as used byEnerSys , adjust net earnings determined in accordance with GAAP for interest, taxes, depreciation and amortization, and certain charges or credits as permitted by our credit agreements, that were recorded during the periods presented.EnerSys' management uses the non-GAAP measures, "primary working capital" and "primary working capital percentage" (see definition in "Liquidity and Capital Resources" below) along with capital expenditures, in its evaluation of business segment cash flow and financial position performance. These non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for cash flow or operating earnings determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that the Company's future results will be unaffected by similar adjustments to operating earnings determined in accordance with GAAP.
Overview
EnerSys (the "Company," "we," or "us") is the world's largest manufacturer, marketer and distributor of industrial batteries. We also manufacture, market and distribute products such as battery chargers, power equipment, battery accessories, and outdoor cabinet enclosures. Additionally, we provide related aftermarket and customer-support services for our products. We market our products globally to over 10,000 customers in more than 100 countries through a network of distributors, independent representatives and our internal sales force. We operate and manage our business in three geographic regions of the world-Americas , EMEA andAsia , as described below. Our business is highly decentralized with manufacturing locations throughout the world. More than half of our manufacturing capacity is located outsidethe United States , and approximately 40% of our net sales were generated outsidethe United States . The Company currently has three reportable business segments based on geographic regions, defined as follows: •Americas , which includesNorth and South America , with our segment headquarters inReading, Pennsylvania , U.S.A.;
• EMEA, which includes
headquarters in Zug, Switzerland ; and
• Asia , which includes Asia , Australia and Oceania , with our segment
headquarters in Singapore .
We evaluate business segment performance based primarily upon operating earnings
exclusive of highlighted items. Highlighted items are those that the Company
deems are not indicative of ongoing operating results, including those charges
that the Company incurs as a result of restructuring activities, impairment of
goodwill and indefinite-lived intangibles and other assets, acquisition
activities and those charges and credits that are not directly related to
operating unit performance, such as significant legal proceedings, ERP system
implementation, amortization of recently acquired intangible assets and tax
valuation allowance changes, including those related to the adoption of the Tax
Cuts and Jobs Act. Because these charges are not incurred as a result of ongoing
operations, or are incurred as a result of a potential or previous acquisition,
they are not as helpful a measure of the performance of our underlying business,
particularly in light of their unpredictable nature and are difficult to
forecast. All corporate and centrally incurred costs are allocated to the
business segments based principally on net sales. We evaluate business segment
cash flow and financial position performance based primarily upon capital
expenditures and primary working capital levels (see definition of primary
working capital in "Liquidity and Capital Resources" below). Although we
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monitor the three elements of primary working capital (receivables, inventory and payables), our primary focus is on the total amount due to the significant impact it has on our cash flow. Our management structure, financial reporting systems, and associated internal controls and procedures, are all consistent with our three geographic business segments. We report on aMarch 31 fiscal year-end. Our financial results are largely driven by the following factors:
• global economic conditions and general cyclical patterns of the industries
in which our customers operate;
• changes in our selling prices and, in periods when our product costs
increase, our ability to raise our selling prices to pass such cost
increases through to our customers;
• the extent to which we are able to efficiently utilize our global
manufacturing facilities and optimize our capacity;
• the extent to which we can control our fixed and variable costs, including
those for our raw materials, manufacturing, distribution and operating
activities;
• changes in our level of debt and changes in the variable interest rates
under our credit facilities; and
• the size and number of acquisitions and our ability to achieve their
intended benefits.
We have two primary product lines: reserve power and motive power products. Net sales classifications by product line are as follows:
• Reserve power products are used for backup power for the continuous
operation of critical applications in telecommunications systems,
uninterruptible power systems, or "UPS" applications for computer and
computer-controlled systems, and other specialty power applications,
including medical and security systems, premium starting, lighting and
ignition applications, in switchgear, electrical control systems used in
electric utilities, large-scale energy storage, energy pipelines, in
commercial aircraft, satellites, military aircraft, submarines, ships andtactical vehicles. Reserve power products also include thermally managed
cabinets and enclosures for electronic equipment and batteries. With the
recent Alpha acquisition, we are a provider of highly integrated power
solutions and services to broadband, telecom, renewable and industrial
customers.
• Motive power products are used to provide power for electric industrial
forklifts used in manufacturing, warehousing and other material handling
applications as well as mining equipment, diesel locomotive starting and
other rail equipment.
Current Market Conditions
Economic Climate
The COVID-19 pandemic has weakened economic activity around the world. China's
economic activity was the hardest hit during our fourth fiscal quarter and two
of our plants in China were shut down for several weeks and order demand slowed
significantly. In Europe and North America , the impact of COVID-19 was felt
towards the end of our fourth quarter so the economic impact was not as severe
as in China . We believe that EMEA and Americas economies will be much harder hit
by the impact of COVID-19 during our first fiscal quarter of fiscal 2021.
While the adverse direct impact from COVID-19 was felt by our factories
in China and our overall supply chain, our factories in both the Americas and
EMEA, deemed essential critical infrastructure suppliers, remain in operation
with some near full capacity while others are experiencing lower demand,
particularly those in our motive power lines of business. We have been able to
meet customer demand while maintaining the safety considerations for those in
our facilities and as many employees continue to work effectively from home. The
pandemic continues to pose challenges in many of our markets including delayed
5G deployments and lower OEM sales to our transportation and motive power
customers as they experience lower demand with their end customers.
Volatility of Commodities and Foreign Currencies
Our most significant commodity and foreign currency exposures are related to
lead and the Euro, respectively. Historically, volatility of commodity costs and
foreign currency exchange rates have caused large swings in our production
costs. As a result of the COVID-19 pandemic and a forecasted global economic
recession, we anticipate that our commodity costs will be lower in the near
future and foreign currency exposures may continue to fluctuate as they have in
the past several years. Since the outbreak of COVID-19 in our fourth fiscal
quarter of 2020, we have experienced declining commodity costs.
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Customer Pricing
Our selling prices fluctuated during the last several years to offset the volatile cost of commodities. Approximately 30% of our revenue is currently subject to agreements that adjust pricing to a market-based index for lead. Lead prices rose for the most part of fiscal 2018, peaked in the first quarter of fiscal 2019 and then declined sequentially in every quarter in fiscal 2019. In fiscal 2020, our selling prices declined in response to declining commodity costs, including lead. Based on current commodity markets, we will likely see year over year benefits from declining commodity prices, with some related reduction in our selling prices in the upcoming year.
Liquidity and Capital Resources
We believe that our financial position is strong, and we have substantial liquidity with$327 million of available cash and cash equivalents and available and undrawn credit lines of approximately$694 million atMarch 31, 2020 to cover short-term liquidity requirements and anticipated growth in the foreseeable future. The nominal amount of credit available is subject to a leverage ratio maximum of 3.5x EBITDA, as discussed in the Liquidity and Capital Resources, which effectively limits additional debt or lowered cash balances by approximately$500 million . In fiscal 2020, we issued$300 million in aggregate principal amount of our 4.375% Senior Notes due 2027 (the "2027 Notes"). Proceeds from this offering, net of debt issuance costs were$296.3 million and were utilized to pay down the balance outstanding on the revolver borrowings. In fiscal 2018, we entered into a credit facility ("2017 Credit Facility") that consisted of a$600.0 million senior secured revolving credit facility ("2017 Revolver") and a$150.0 million senior secured term loan ("2017 Term Loan") with a maturity date ofSeptember 30, 2022 . OnDecember 7, 2018 , we amended the 2017 Credit Facility (as amended, the "Amended Credit Facility"). The Amended Credit Facility consists of$449.1 million senior secured term loans (the "Amended 2017 Term Loan"), including aCAD 133.1 million ($99.1 million ) term loan and a$700.0 million senior secured revolving credit facility (the "Amended 2017 Revolver"). The amendment resulted in an increase of the 2017 Term Loan and the 2017 Revolver by$299.1 million and$100.0 million , respectively. In fiscal 2020 and 2019 we repurchased$34.6 million and$56.0 million of our common stock under existing authorizations, respectively. In fiscal 2020 and fiscal 2019, we reissued 17,410 and 3,256 shares out of our treasury stock, respectively, to participants under the Company's Employee Stock Purchase Plan.
In fiscal 2019, we reissued 1,177,630 shares from our treasury stock to satisfy
In fiscal 2018, we repurchased$121.0 million of our common stock through an accelerated share repurchase program ("ASR") with a major financial institution and through open market purchases. A substantial majority of the Company's cash and investments are held by foreign subsidiaries. The majority of that cash and investments is expected to be utilized to fund local operating activities, capital expenditure requirements and acquisitions. The Company believes that it has sufficient sources of domestic and foreign liquidity.
We believe that our strong capital structure and liquidity affords us access to capital for future capital expenditures, acquisition and stock repurchase opportunities and continued dividend payments.
Cost Savings Initiatives
Cost savings programs remain a continuous element of our business strategy and are directed primarily at further reductions in plant manufacturing (labor and overhead), raw material costs and our operating expenses (primarily selling, general and administrative). In order to realize cost savings benefits for a majority of these initiatives, costs are incurred either in the form of capital expenditures, funding the cash obligations of previously recorded restructuring expenses or current period expenses. InJanuary 2017 , we started our Operational Excellence program, referred to as the EnerSys Operating System, or EOS, which serves as our continuous improvement engine. During fiscal 2018 and 2019, we were able to fund our investment in new product development and digital core with savings of approximately$25 million in each year, primarily from restructuring programs. Our global deployment of EOS began to slow in fiscal 2019 and we have struggled to maintain pace with surging customer demand for TPPL amidst disruptions in fiscal 2019 from our ERP implementation and in fiscal 2020 from a fire, both 29
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adversely impacting our productivity at ourRichmond motive power facility. We constantly evaluate the return on investment to ensure we achieve our targeted improvement by the end of fiscal 2021.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 - Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8. In preparing our financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts in the Consolidated Financial Statements and accompanying notes. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. We discuss below the more significant estimates and related assumptions used in the preparation of our Consolidated Financial Statements. If actual results were to differ materially from the estimates made, the reported results could be materially affected.
Revenue Recognition
We adopted the new accounting standard for the recognition of revenue under ASC 606 for the fiscal year beginning onApril 1, 2019 . Under this standard, we recognize revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a customer. The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time or satisfy the performance obligation at a point in time through analysis of the following criteria: (i) the entity has a present right to payment, (ii) the customer has legal title, (iii) the customer has physical possession, (iv) the customer has the significant risks and rewards of ownership and (v) the customer has accepted the asset. Our primary performance obligation to our customers is the delivery of finished goods and products, pursuant to purchase orders. Control of the products sold typically transfers to our customers at the point in time when the goods are shipped as this is also when title generally passes to our customers under the terms and conditions of our customer arrangements.
We assess collectibility based primarily on the customer's payment history and on the creditworthiness of the customer.
Management believes that the accounting estimates related to revenue recognition are critical accounting estimates because they require reasonable assurance of collection of revenue proceeds and completion of all performance obligations. Also, revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. These estimates are based on our past experience. For additional information on the new accounting standard for the recognition of revenue see Note 1 of Notes to the Consolidated Financial Statements.
Asset Impairment Determinations
We test for the impairment of our goodwill and indefinite-lived trademarks at least annually and whenever events or circumstances occur indicating that a possible impairment has been incurred.
We perform our annual goodwill impairment test on the first day of our fourth
quarter for each of our reporting units based on the income approach, also known
as the discounted cash flow ("DCF") method, which utilizes the present value of
future cash flows to estimate fair value. We also use the market approach, which
utilizes market price data of companies engaged in the same or a similar line of
business as that of our company, to estimate fair value. A reconciliation of the
two methods is performed to assess the reasonableness of fair value of each of
the reporting units.
The future cash flows used under the DCF method are derived from estimates of
future revenues, operating income, working capital requirements and capital
expenditures, which in turn reflect our expectations of specific global,
industry and market conditions. The discount rate developed for each of the
reporting units is based on data and factors relevant to the economies in which
the business operates and other risks associated with those cash flows,
including the potential variability in the amount and timing of the cash flows.
A terminal growth rate is applied to the final year of the projected period and
reflects our estimate of stable growth to perpetuity. We then calculate the
present value of the respective cash flows for each reporting unit to arrive at
the fair value using the income approach and then determine the appropriate
weighting between the fair value estimated using the income approach and the
fair value estimated using the market approach. Finally, we compare the
estimated fair value of each reporting unit to its respective carrying value in
order to determine if the goodwill assigned to each reporting unit is
potentially impaired. If the fair value of the reporting unit exceeds its
carrying value, goodwill is not impaired and no further testing is required. If
the fair value of the reporting unit is less than the carrying value, an
impairment charge is recognized for
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the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
Significant assumptions used include management's estimates of future growth rates, the amount and timing of future operating cash flows, capital expenditures, discount rates, as well as market and industry conditions and relevant comparable company multiples for the market approach. Assumptions utilized are highly judgmental, especially given the role technology plays in driving the demand for products in the telecommunications and aerospace markets. Our annual goodwill impairment test, which we performed during the fourth quarter of fiscal 2020, resulted in an impairment charge for goodwill of$39.7 million in ourAsia reporting unit, and a$4.5 million impairment of trademarks in EMEA, as discussed in Note 7 to the Consolidated Financial Statements. There was no goodwill remaining in theAsia reporting unit after this impairment charge was recorded. The excess of fair value over carrying value for each of our reporting units for which we performed a quantitative goodwill impairment test, as ofDecember 30, 2019 , the annual testing date, ranged from approximately 9% to approximately 180% of carrying value, except in the case of ourAsia region. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair values of each reporting unit. This hypothetical 10% decrease would result in excess fair values over carrying values range from approximately 40% to approximately 152% of the carrying values, except ourSouth America reporting unit, where the fair value would be below the carrying value by 2%.South America's goodwill was$1.9 million and$2.6 million as ofMarch 31, 2020 and 2019, respectively. We evaluate goodwill on an annual basis as of the beginning of our fourth fiscal quarter and whenever events or changes in circumstances, such as significant adverse changes in business climate or operating results, changes in management's business strategy or loss of a major customer, indicate that there may be a potential indicator of impairment. The indefinite-lived trademarks are tested for impairment by comparing the carrying value to the fair value based on current revenue projections of the related operations, under the relief from royalty method. Any excess carrying value over the amount of fair value is recognized as impairment. Any impairment would be recognized in full in the reporting period in which it has been identified. With respect to our other long-lived assets other than goodwill and indefinite-lived trademarks, we test for impairment when indicators of impairment are present. An asset is considered impaired when the undiscounted estimated net cash flows expected to be generated by the asset are less than its carrying amount. The impairment recognized is the amount by which the carrying amount exceeds the fair value of the impaired asset.
Business Combinations
We account for business combinations in accordance with ASC 805, Business
Combinations. We recognize assets acquired and liabilities assumed in
acquisitions at their fair values as of the acquisition date, with the
acquisition-related transaction and
restructuring costs expensed in the period incurred. Determining the fair value
of assets acquired and liabilities assumed often involves estimates based on
third-party valuations, such as appraisals, or internal valuations based on
discounted cash flow analyses and may include estimates of attrition, inflation,
asset growth rates, discount rates, multiples of earnings or other relevant
factors. In addition, fair values are subject to refinement for up to a year
after the closing date of an acquisition. Adjustments recorded to the acquired
assets and liabilities are applied prospectively.
Fair values are based on estimates using management's assumptions using future
growth rates, future attrition of the customer base, discount rates, multiples
of earnings or other relevant factors.
Any change in the acquisition date fair value of assets acquired and liabilities
assumed may materially affect our financial position, results of operations and
liquidity.
Litigation and Claims
From time to time, the Company has been or may be a party to various legal
actions and investigations including, among others, employment matters,
compliance with government regulations, federal and state employment laws,
including wage and hour laws, contractual disputes and other matters, including
matters arising in the ordinary course of business. These claims may be brought
by, among others, governments, customers, suppliers and employees. Management
considers the measurement of litigation reserves as a critical accounting
estimate because of the significant uncertainty in some cases relating to the
outcome
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of potential claims or litigation and the difficulty of predicting the likelihood and range of potential liability involved, coupled with the material impact on our results of operations that could result from litigation or other claims.
In determining legal reserves, management considers, among other inputs:
• interpretation of contractual rights and obligations;
• the status of government regulatory initiatives, interpretations and
investigations;
• the status of settlement negotiations;
• prior experience with similar types of claims;
• whether there is available insurance coverage; and
• advice of outside counsel.
For certain matters, management is able to estimate a range of losses. When a loss is probable, but no amount of loss within a range of outcomes is more likely than any other outcome, management will record a liability based on the low end of the estimated range. Additionally, management will evaluate whether losses in excess of amounts accrued are reasonably possible, and will make disclosure of those matters based on an assessment of the materiality of those addition possible losses.
Environmental Loss Contingencies
Accruals for environmental loss contingencies (i.e., environmental reserves) are recorded when it is probable that a liability has been incurred and the amount can reasonably be estimated. Management views the measurement of environmental reserves as a critical accounting estimate because of the considerable uncertainty surrounding estimation, including the need to forecast well into the future. From time to time, we may be involved in legal proceedings under federal, state and local, as well as international environmental laws in connection with our operations and companies that we have acquired. The estimation of environmental reserves is based on the evaluation of currently available information, prior experience in the remediation of contaminated sites and assumptions with respect to government regulations and enforcement activity, changes in remediation technology and practices, and financial obligations and creditworthiness of other responsible parties and insurers.
Warranty
We record a warranty reserve for possible claims against our product warranties, which generally run for a period ranging from one to twenty years for our reserve power batteries and for a period ranging from one to seven years for our motive power batteries. The assessment of the adequacy of the reserve includes a review of open claims and historical experience. Management believes that the accounting estimate related to the warranty reserve is a critical accounting estimate because the underlying assumptions used for the reserve can change from time to time and warranty claims could potentially have a material impact on our results of operations.
Allowance for Doubtful Accounts
We encounter risks associated with sales and the collection of the associated
accounts receivable. We record a provision for accounts receivable that are
considered to be uncollectible. In order to calculate the appropriate provision,
management analyzes the creditworthiness of specific customers and the aging of
customer balances. Management also considers general and specific industry
economic conditions, industry concentration and contractual rights and
obligations.
Management believes that the accounting estimate related to the allowance for
doubtful accounts is a critical accounting estimate because the underlying
assumptions used for the allowance can change from time to time and
uncollectible accounts could potentially have a material impact on our results
of operations.
Retirement Plans
We use certain economic and demographic assumptions in the calculation of the
actuarial valuation of liabilities associated with our defined benefit plans.
These assumptions include the discount rate, expected long-term rates of return
on assets and rates of increase in compensation levels. Changes in these
assumptions can result in changes to the pension expense and recorded
liabilities. Management reviews these assumptions at least annually. We use
independent actuaries to assist us in formulating assumptions and making
estimates. These assumptions are updated periodically to reflect the actual
experience and expectations on a plan-specific basis, as appropriate.
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For benefit plans which are funded, we establish strategic asset allocation percentage targets and appropriate benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk. We set the expected long-term rate of return based on the expected long-term average rates of return to be achieved by the underlying investment portfolios. In establishing this rate, we consider historical and expected returns for the asset classes in which the plans are invested, advice from pension consultants and investment advisors, and current economic and capital market conditions. The expected return on plan assets is incorporated into the computation of pension expense. The difference between this expected return and the actual return on plan assets is deferred and will affect future net periodic pension costs through subsequent amortization. We believe that the current assumptions used to estimate plan obligations and annual expense are appropriate in the current economic environment. However, if economic conditions change materially, we may change our assumptions, and the resulting change could have a material impact on the Consolidated Statements of Income and on the Consolidated Balance Sheets.
Equity-Based Compensation
We recognize compensation cost relating to equity-based payment transactions by using a fair-value measurement method whereby all equity-based payments to employees, including grants of restricted stock units, stock options, market and performance condition-based awards are recognized as compensation expense based on fair value at grant date over the requisite service period of the awards. We determine the fair value of restricted stock units based on the quoted market price of our common stock on the date of grant. The fair value of stock options is determined using the Black-Scholes option-pricing model, which uses both historical and current market data to estimate the fair value. The fair value of market condition-based awards is estimated at the date of grant using a Monte Carlo Simulation. The fair value of performance condition-based awards is based on the closing stock price on the date of grant, adjusted for a discount to reflect the illiquidity inherent in these awards. All models incorporate various assumptions such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the awards. When estimating the requisite service period of the awards, we consider many related factors including types of awards, employee class, and historical experience. Actual results, and future changes in estimates of the requisite service period may differ substantially from our current estimates.
Income Taxes
Our effective tax rate is based on pretax income and statutory tax rates
available in the various jurisdictions in which we operate. We account for
income taxes in accordance with applicable guidance on accounting for income
taxes, which requires that deferred tax assets and liabilities be recognized
using enacted tax rates for the effect of temporary differences between book and
tax bases on recorded assets and liabilities. Accounting guidance also requires
that deferred tax assets be reduced by a valuation allowance, when it is more
likely than not that a tax benefit will not be realized.
The recognition and measurement of a tax position is based on management's best
judgment given the facts, circumstances and information available at the
reporting date. We evaluate tax positions to determine whether the benefits of
tax positions are more likely than not of being sustained upon audit based on
the technical merits of the tax position. For tax positions that are more likely
than not of being sustained upon audit, we recognize the largest amount of the
benefit that is greater than 50% likely of being realized upon ultimate
settlement in the financial statements. For tax positions that are not more
likely than not of being sustained upon audit, we do not recognize any portion
of the benefit in the financial statements. If the more likely than not
threshold is not met in the period for which a tax position is taken, we may
subsequently recognize the benefit of that tax position if the tax matter is
effectively settled, the statute of limitations expires, or if the more likely
than not threshold is met in a subsequent period.
We evaluate, on a quarterly basis, our ability to realize deferred tax assets by
assessing our valuation allowance and by adjusting the amount of such allowance,
if necessary. The factors used to assess the likelihood of realization are our
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the net deferred tax assets.
To the extent we prevail in matters for which reserves have been established, or
are required to pay amounts in excess of our reserves, our effective tax rate in
a given financial statement period could be materially affected.
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Results of Operations-Fiscal 2020 Compared to Fiscal 2019
The following table presents summary Consolidated Statement of Income data for fiscal year endedMarch 31, 2020 , compared to fiscal year endedMarch 31, 2019 : Fiscal 2020 Fiscal 2019 Increase (Decrease) In As % In As % In Millions Net Sales Millions Net Sales Millions % Net sales$ 3,087.8 100.0 %$ 2,808.0 100.0 %$ 279.8 10.0 % Cost of goods sold 2,301.0 74.5 2,104.6 74.9 196.4 9.3 Inventory step up to fair value relating to acquisitions and exit activities 1.9 0.1 10.3 0.4 (8.4 ) (82.1 ) Gross profit 784.9 25.4 693.1 24.7 91.8 13.3 Operating expenses 529.7 17.1 441.4 15.7 88.3 20.0 Restructuring, exit and other charges 20.8 0.7 34.8 1.2 (14.0 ) (40.2 ) Impairment of goodwill 39.7 1.3 - - 39.7 NM Impairment of indefinite-lived intangibles 4.5 0.1 - - 4.5 NM Legal proceedings charge, net - - 4.4 0.2 (4.4 ) NM Operating earnings 190.2 6.1 212.5 7.6
(22.3 ) (10.5 )
Interest expense 43.7 1.4 30.9 1.1 12.8 41.5
Other (income)
expense, net (0.5 ) - (0.5 ) - - -
Earnings before
income taxes 147.0 4.7 182.1 6.5 (35.1 ) (19.4 )
Income tax expense 9.9 0.3 21.6 0.8 (11.7 ) (54.5 )
Net earnings 137.1 4.4 160.5 5.7 (23.4 ) (14.6 )
Net earnings
attributable to
noncontrolling
interests - - 0.3 - (0.3 ) NM
Net earnings
attributable to
EnerSys stockholders $ 137.1 4.4 % $ 160.2 5.7 % NM = not meaningful Overview Our sales in fiscal 2020 were$3.1 billion , a 10% increase from prior year's sales. This increase was the result of a 17% increase due to the Alpha and NorthStar acquisitions (as discussed in Part I, Item 1 of this Annual Report), partially offset by a 4% decrease in organic volume, a 2% decrease in foreign currency translation impact and a 1% decrease in pricing. Organic volume decline in fiscal 2020 reflects the impact of the recent fire and ERP execution challenges in ourRichmond, Kentucky facility and weakness in the European and Asian markets.
A discussion of specific fiscal 2020 versus fiscal 2019 operating results follows, including an analysis and discussion of the results of our reportable segments.
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Table of ContentsNet Sales Segment sales Fiscal 2020 Fiscal 2019 Increase (Decrease) In % Net In % Net In Millions Sales Millions Sales Millions % Americas$ 2,082.3 67.4 %$ 1,690.9 60.2 %$ 391.4 23.1 % EMEA 787.3 25.5 860.6 30.7 (73.3 ) (8.5 ) Asia 218.2 7.1 256.5 9.1 (38.3 ) (14.9 ) Total net sales$ 3,087.8 100.0 %$ 2,808.0 100.0 %$ 279.8 10.0 % TheAmericas segment's net sales increased by$391.4 million or 23.1% in fiscal 2020, as compared to fiscal 2019, primarily due to a 26% increase from the Alpha and NorthStar acquisitions, partially offset by a 1% decrease each in organic volume, pricing and currency translation impact. The EMEA segment's net sales decreased by$73.3 million or 8.5% in fiscal 2020, as compared to fiscal 2019, primarily due to a 6% decrease in organic volume, a 4% decrease in currency translation impact and a 1% decrease in pricing, partially offset by a 2% increase from the NorthStar acquisition. The decrease in organic volume was driven in part by the return of a competitor to the market in fiscal 2020. This competitor was absent in fiscal 2019 due to a fire at their facility. TheAsia segment's net sales decreased by$38.3 million or 14.9% in fiscal 2020, as compared to fiscal 2019, primarily due to a 11% decrease in organic volume reflecting dramatic declines of telecom demand inChina and the impact from the COVID-19 pandemic, a 3% decrease in currency translation impact and a 1% decrease in pricing.
Product line sales
Fiscal 2020 Fiscal 2019 Increase (Decrease)
In As % In As % In
Millions Net Sales Millions Net Sales Millions %
Reserve power $ 1,739.6 56.3 % $ 1,416.2 50.4 % $ 323.4 22.8 %
Motive power 1,348.2 43.7 1,391.8 49.6 (43.6 ) (3.1 )
Total net sales $ 3,087.8 100.0 % $ 2,808.0 100.0 % $ 279.8 10.0 %
Sales in our reserve power products increased in fiscal 2020 by $323.4 million
or 22.8% compared to the prior year, primarily due to a 33% increase from the
Alpha and NorthStar acquisitions, partially offset by a 7% decrease in organic
volume, a 2% decrease in currency translation impact and a 1% decrease in
pricing. The decrease in organic volume in fiscal 2020 is primarily from the
deferral of spending by telecom and broadband customers and the conclusion of a
large enclosure order a year ago.
Sales in our motive power products decreased in fiscal 2020 by $43.6 million or
3.1% compared to the prior year, primarily due to a 2% decrease in currency
translation impact and a 1% decrease in pricing. The lack of organic growth in
motive power product volume is due to weak European markets, the recent fire in
our Richmond, Kentucky facility and the impact from the COVID-19 pandemic on our
fourth fiscal quarter sales.
Gross Profit
Fiscal 2020 Fiscal 2019 Increase (Decrease)
In As % In As % In
Millions Net Sales Millions Net Sales Millions %
Gross profit $ 784.9 25.4 % $ 693.1 24.7 % $ 91.8 13.3 %
Gross profit increased $91.8 million or 13.3% in fiscal 2020 compared to fiscal
2019. Gross profit, as a percentage of net sales, increased 70 basis points in
fiscal 2020 compared to fiscal 2019. This increase in the gross profit margin is
largely a function of declines in commodity costs relative to pricing, partially
offset by higher manufacturing costs.
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Operating Items
Fiscal 2020 Fiscal 2019 Increase (Decrease)
In As % In As % In
Millions Net Sales Millions Net Sales Millions %
Operating expenses $ 529.7 17.1 % $ 441.4 15.7 % $ 88.3 20.0 %
Restructuring, exit
and other charges 20.8 0.7 34.8 1.2 (14.0 ) (40.2 )
Impairment of
goodwill 39.7 1.3 - - 39.7 NM
Impairment of
indefinite-lived
intangibles 4.5 0.1 - - 4.5 NM
Legal proceedings
charge, net - - 4.4 0.2 (4.4 ) NM
NM = not meaningful
Operating Expenses
Operating expenses increased $88.3 million or 20% in fiscal 2020 from fiscal
2019 and increased as a percentage of net sales by 140 basis points. Excluding
the impact of the foreign currency translation, the increase reflects the
inclusion of Alpha and NorthStar, as well as an increase of $25.0 million
towards new product development.
Selling expenses, our main component of operating expenses, were 44.7% of sales in fiscal 2020, compared to 46.4% of sales in fiscal 2019.
Impairment of goodwill and indefinite-lived intangibles
Goodwill is tested annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances that indicate goodwill is more likely than not impaired. In the fourth quarter of fiscal 2020, we conducted our annual goodwill impairment test which indicated that the fair value ofAsia was less than its carrying value. We recorded a non-cash charge of$39.7 million related to goodwill impairment inAsia under the caption "Impairment of goodwill" in the Consolidated Statements of Income. We also recorded a non-cash charge of$4.5 million related to indefinite-lived trademarks in EMEA, under the caption "Impairment of indefinite-lived intangibles" in the Consolidated Statements of Income. The key factors contributing to the impairment inAsia was the increasing pressure on organic sales growth that we began to experience in fiscal 2019 due to a slowdown in telecom spending in the PRC amidst growing trade tensions between theU.S.A andChina . The impact of these trade tensions on our ability to capture market share in PRC accelerated in the second half of the fiscal year. Throughout fiscal 2020, there was a general slowdown in the Chinese economy which was further exacerbated by the outbreak of the COVID -19 pandemic, causing disruption to two of our plants inChina in the fourth quarter. Also contributing to the poor performance of theAsia region was a general softening of demand inAustralia , that began in fiscal 2019 and continued throughout fiscal 2020. We monitored the performance of ourAsia reporting unit for interim impairment indicators throughout fiscal 2020, but the emergence of COVID-19 inChina inDecember 2019 coupled with the totality of economic headwinds in the region resulted in the recognition of a goodwill impairment loss in connection with our annual impairment test. During the fourth quarter of fiscal 2020, management completed its evaluation of key inputs used to estimate the fair value of its indefinite-lived trademarks and determined that an impairment charge relating to two of its trademarks in the EMEA reporting unit, that were acquired through legacy acquisitions was appropriate, as it plans to phase out these trademarks.
Restructuring, exit and other charges
Included in our fiscal 2020 operating results are restructuring charges of$2.5 million in theAmericas and$7.0 million in EMEA, both primarily relating to the recent NorthStar acquisition and$1.5 million inAsia . Also included in the fiscal 2020 operating results are exit charges of$5.1 million in EMEA, including$2.2 million of cash charges, relating to the closure of our facility in Targovishte,Bulgaria , that commenced in fiscal 2019 as explained below.
In keeping with our strategy of exiting the manufacture of batteries for
diesel-electric submarines, during fiscal 2020, we sold certain licenses and
assets for
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During fiscal 2020, we also wrote off
Included in our fiscal 2019 operating results are restructuring and exit charges of$4.0 million inAmericas ,$27.0 million in EMEA and$3.8 million inAsia . Of the$27.0 million charges in EMEA,$17.7 million related to the closure of our facility in Targovishte,Bulgaria ,$4.9 million related to the disposition of GAZ Geräte - undAkkumulatorenwerk Zwickau GmbH , a wholly-owned German subsidiary,$3.4 million related to improving efficiencies of our general operations and$1.0 million related to dissolving a joint venture inTunisia . The facility inBulgaria produced diesel-electric submarine batteries. Management determined that the future demand for batteries of diesel-electric submarines was not sufficient given the number of competitors in the market. The$17.7 million charges were primarily non-cash charges of$15.0 million related to the write-off of fixed assets and$2.7 million of severance payments. In addition, cost of goods sold also included a$2.5 million of inventory write-off relating to the closure of theBulgaria facility. These exit activities are a consequence of the Company's strategic decision to streamline its product portfolio and focus its efforts on new technologies. The charges inAsia primarily relate to improving efficiencies in the PRC in light of recent decline in demand.
OnSeptember 19, 2019 , a fire broke out in the battery formation area of ourRichmond, Kentucky motive power production facility. We maintain insurance policies for both property damage and business interruption and are finishing cleanup and repair. We believe that the total claim, including the replacement of inventory and equipment, the cleanup and repairs to the building, as well as the claim for business interruption is nearly$50 million . We recorded$10.0 million of damages caused to our fixed assets and inventories, as well as for cleanup, asset replacement and other ancillary activities directly associated with the fire, which were initially reflected as a receivable for probable insurance recoveries. We received$12.0 million in advances related to our initial claims for recovery from our property and casualty insurance carriers in fiscal 2020. Subsequent toMarch 31, 2020 , we also received an additional$8.7 million towards the business interruption claim, of which,$5.0 million was booked as a reduction to our cost of goods sold in our fourth quarter. 37
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Operating Earnings
Operating earnings by segment were as follows:
Fiscal 2020 Fiscal 2019 Increase (Decrease)
In As % In As % In
Millions Net Sales(1) Millions Net Sales(1) Millions %
Americas $ 206.9 9.9 % $ 186.9 11.0 % $ 20.0 10.8 %
EMEA 50.2 6.4 71.9 8.4 (21.7 ) (30.3 )
Asia - - 3.2 1.3 (3.2 ) (100.0 )
Subtotal 257.1 8.3 262.0 9.3 (4.9 ) (1.9 )
Inventory step up to fair
value relating to
acquisitions and exit
activities
- Americas (1.9 ) (0.1 ) (7.2 ) (0.4 ) 5.3 NM
Restructuring charges -
Americas (2.5 ) (0.1 ) (4.0 ) (0.2 ) 1.5 (36.4 )
Inventory adjustment
relating to exit activities
- EMEA - - (2.6 ) (0.3 ) 2.6 NM
Restructuring and other exit
charges - EMEA (11.3 ) (1.4 ) (27.0 ) (3.1 ) 15.7 (54.0 )
Inventory adjustment
relating to exit activities
- Asia - - (0.5 ) (0.2 ) 0.5 NM
Restructuring charges - Asia (1.5 ) (0.7 ) (3.8 ) (1.4 ) 2.3 (61.0 )
Fixed asset write-off
relating to exit activities
and other - Americas (5.5 ) (0.3 ) - - (5.5 ) NM
Impairment of
indefinite-lived intangibles
- EMEA (4.5 ) (0.6 ) - - (4.5 ) NM
Impairment of goodwill -
Asia (39.7 ) (18.2 ) - - (39.7 ) NM
Legal proceedings charge,
net - EMEA - - (4.4 ) (0.5 ) 4.4 NM
Total operating earnings $ 190.2 6.1 % $ 212.5 7.6 % $ (22.3 ) (10.5 )%
NM = not meaningful (1) The percentages shown for the segments are computed as a percentage of the
applicable segment's net sales.
Operating earnings decreased $22.3 million or 10.5% in fiscal 2020, compared to
fiscal 2019. Operating earnings, as a percentage of net sales, decreased 150
basis points in fiscal 2020, compared to fiscal 2019. Excluding the impact of
highlighted items, operating earnings in fiscal 2020 decreased 100 basis points
primarily due to the recent fire at our Richmond, Kentucky facility which
continued to result in missed sales opportunities and higher manufacturing
costs, as well as the decline in our organic volume in EMEA and Asia .
The Americas segment's operating earnings, increased $20.0 million or 10.8% in
fiscal 2020 compared to fiscal 2019, with the operating margin decreasing 110
basis points to 9.9%. The decrease is primarily due to the recent fire at our
Richmond, Kentucky , facility which continued to result in missed sales
opportunities and higher manufacturing costs. This negative impact was partially
offset by the impact of lower commodity costs and Alpha's contribution to
operating earnings of $53.2 million or 9.7% of its sales for fiscal 2020.
The EMEA segment's operating earnings, decreased
TheAsia segment's operating earnings, decreased$3.2 million in fiscal 2020 compared to fiscal 2019, with the operating margin decreasing by 130 basis points to 0%. Lower organic volume caused by the slowdown in the Chinese economy as well as the recent disruption due to the COVID-19 pandemic to our two plants were the primary reasons for the poor performance of ourAsia region. 38
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Interest Expense
Fiscal 2020 Fiscal 2019 Increase (Decrease)
In As % In As % In
Millions Net Sales Millions Net Sales Millions %Interest expense$ 43.7 1.4 %$ 30.9 1.1 %$ 12.8 41.5 % Interest expense of$43.7 million in fiscal 2020 (net of interest income of$2.2 million ) was$12.8 million higher than the$30.9 million in fiscal 2019 (net of interest income of$2.1 million ). Our average debt outstanding was$1,097.9 million in fiscal 2020, compared to our average debt outstanding of$742.0 million in fiscal 2019. Our average cash interest rate incurred in fiscal 2020 was 3.8% and was 4.1% in fiscal 2019. The increase in interest expense was primarily due to higher average debt incurred to fund the Alpha and NorthStar acquisitions. In connection with the issuance of the 2027 Notes, we capitalized$4.6 million of debt issuance costs. Included in interest expense were non-cash charges related to amortization of deferred financing fees of$1.7 million in fiscal 2020 and$1.3 million in fiscal 2019.
Other (Income) Expense, Net
Fiscal 2020 Fiscal 2019 Increase (Decrease)
In As % In As % In
Millions Net Sales Millions Net Sales Millions %
Other (income)
expense, net $ (0.5 ) - % $ (0.5 ) - % $ - - %
Other (income) expense, net was income of $0.5 million in fiscal 2020 compared
to income of $0.5 million in fiscal 2019. Foreign currency losses were $0.3
million in fiscal 2020 compared to foreign currency gains of $3.1 million in
fiscal 2019.
Earnings Before Income Taxes
Fiscal 2020 Fiscal 2019 Increase (Decrease)
In As % In As % In
Millions Net Sales Millions Net Sales Millions %
Earnings before
income taxes $ 147.0 4.7 % $ 182.1 6.5 % $ (35.1 ) (19.4 )%
As a result of the factors discussed above, fiscal 2020 earnings before income
taxes were
Income Tax Expense
Fiscal 2020 Fiscal 2019 Increase (Decrease)
In As % In As % In
Millions Net Sales Millions Net Sales Millions %
Income tax expense $ 9.9 0.3 % $ 21.6 0.8 % $ (11.7 ) (54.5 )%
Effective tax rate 6.7 % 11.9 % (5.2 )%
Our effective income tax rate with respect to any period may be volatile based
on the mix of income in the tax jurisdictions in which we operate and the amount
of our consolidated income before taxes.
On December 22, 2017 , the Tax Cuts and Jobs Act ("Tax Act") was enacted into
law. Among the significant changes resulting from the law, the Tax Act reduced
the U.S. federal income tax rate from 35% to 21% effective January 1, 2018 , and
required companies to pay a one-time transition tax on unrepatriated cumulative
non-U.S. earnings of foreign subsidiaries and created new taxes on certain
foreign sourced earnings. The U.S. federal statutory tax rate for fiscal 2020
and 2019 is 21.0%.
The Company's income tax provision consists of federal, state and foreign income
taxes. The effective income tax rate was 6.7% in fiscal 2020 compared to the
fiscal 2019 effective income tax rate of 11.9%. The rate decrease in fiscal 2020
compared
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to fiscal 2019 is primarily due to changes in mix of earnings among tax jurisdictions, Swiss tax reform, and items related to the Tax Act in fiscal 2019.
OnMay 19, 2019 , a public referendum held inSwitzerland approved the Federal Act on Tax Reform and AHV (Old-Age and Survivors Insurance ) Financing (TRAF) as adopted by the Swiss Federal Parliament onSeptember 28, 2018 . The Swiss tax reform measures are effectiveJanuary 1, 2020 . Certain provisions of the TRAF were enacted during the second quarter of fiscal 2020. Significant changes in the tax reform include the abolishment of preferential tax regimes for holding companies, domicile companies and mixed companies at the cantonal level. The transitional provisions of the TRAF allow companies to elect tax basis adjustments to fair value, which is used for tax depreciation and amortization purposes resulting in a deduction over the transitional period. We recorded a net deferred tax asset of$22.5 million during fiscal 2020, related to the amortizable goodwill. The fiscal 2020 foreign effective income tax rate was (7.4%) on foreign pre-tax income of$110.7 million compared to effective income tax rate of 12.3% on foreign pre-tax income of$128.9 million in fiscal 2019. For both fiscal 2020 and 2019, the difference in the foreign effective tax rate versus theU.S. statutory rate of 21% is primarily attributable to lower tax rates in the foreign countries in which we operate. The rate decrease in fiscal 2020 compared to fiscal 2019 is primarily due to Swiss tax reform and changes in the mix of earnings among tax jurisdictions. Income from our Swiss subsidiary comprised a substantial portion of our overall foreign mix of income for both fiscal 2020 and fiscal 2019 and was taxed, excluding the impact from Swiss tax reform, at approximately 3% and 4%, respectively.
Results of Operations-Fiscal 2019 Compared to Fiscal 2018
The following table presents summary Consolidated Statement of Income data for fiscal year endedMarch 31, 2019 , compared to fiscal year endedMarch 31, 2018 : Fiscal 2019 Fiscal 2018 Increase (Decrease) In As % In As % In Millions Net Sales Millions Net Sales Millions % Net sales$ 2,808.0 100.0 %$ 2,581.8 100.0 %$ 226.2 8.8 % Cost of goods sold 2,104.6 74.9 1,920.0 74.4 184.6 9.6 Inventory adjustment relating to acquisition and exit activities 10.3 0.4 3.4 0.1 6.9 NM Gross profit 693.1 24.7 658.4 25.5 34.7 5.3 Operating expenses 441.4 15.7 382.1 14.8 59.3 15.5 Restructuring and other exit charges 34.8 1.2 5.5 0.2 29.3 NM Legal proceedings charge, net 4.4 0.2 - - 4.4 NM Operating earnings 212.5 7.6 270.8 10.5 (58.3 ) (21.6 ) Interest expense 30.9 1.1 25.0 1.0 5.9 23.5 Other (income) expense, net (0.5 ) - 7.5 0.3 (8.0 ) NM Earnings before income taxes 182.1 6.5 238.3 9.2 (56.2 ) (23.5 ) Income tax expense 21.6 0.8 118.5 4.6 (96.9 ) (81.8 ) Net earnings 160.5 5.7 119.8 4.6 40.7 34.0 Net earnings (losses) attributable to noncontrolling interests 0.3 - 0.2 - 0.1 62.3 Net earnings attributable to EnerSys stockholders$ 160.2 5.7 %$ 119.6 4.6 %
NM = not meaningful Overview Our sales in fiscal 2019 were$2.8 billion , an 8.8% increase from prior year's sales. This increase was the result of a 6% increase due to the Alpha acquisition (as discussed in Part I, Item 1 of this Annual Report), a 3% increase in organic volume and a 2% increase in pricing, partially offset by a 2% decrease in foreign currency translation impact.
A discussion of specific fiscal 2019 versus fiscal 2018 operating results follows, including an analysis and discussion of the results of our reportable segments.
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Table of ContentsNet Sales Segment sales Fiscal 2019 Fiscal 2018 Increase (Decrease) In % Net In % Net In Millions Sales Millions Sales Millions % Americas$ 1,690.9 60.2 %$ 1,429.8 55.4 %$ 261.1 18.3 % EMEA 860.6 30.7 849.5 32.9 11.1 1.3 Asia 256.5 9.1 302.5 11.7 (46.0 ) (15.2 ) Total net sales$ 2,808.0 100.0 %$ 2,581.8 100.0 %$ 226.2 8.8 % TheAmericas segment's net sales increased by$261.1 million or 18.3% in fiscal 2019, as compared to fiscal 2018, primarily due to an 11% increase due to the Alpha acquisition, a 6% increase in organic volume and a 3% increase in pricing, partially offset by a 2% decrease in currency translation impact. The EMEA segment's net sales increased by$11.1 million or 1.3% in fiscal 2019, as compared to fiscal 2018, primarily due to a 5% increase in organic volume, partially offset by a 4% decrease in currency translation impact. TheAsia segment's net sales decreased by$46.0 million or 15.2% in fiscal 2019, as compared to fiscal 2018, primarily due to a 14% decrease in organic volume reflecting dramatic declines inChina telecom demands and a general softening of demand inAustralia , and a 3% decrease in currency translation impact, partially offset by a 2% increase in pricing. Product line sales Fiscal 2019 Fiscal 2018 Increase (Decrease) In As % In As % In Millions Net Sales Millions Net Sales Millions % Reserve power$ 1,416.2 50.4 %$ 1,247.9 48.3 %$ 168.3 13.5 % Motive power 1,391.8 49.6 1,333.9 51.7 57.9 4.3 Total net sales$ 2,808.0 100.0 %$ 2,581.8 100.0 %$ 226.2 8.8 % Sales in our reserve power products increased in fiscal 2019 by$168.3 million or 13.5% compared to the prior year, primarily due to a 13% increase due to the Alpha acquisition, a 2% increase in pricing, and a 1% increase in organic volume, partially offset by a 2% decrease in currency translation impact.
Sales in our motive power products increased in fiscal 2019 by
Gross Profit
Fiscal 2019 Fiscal 2018 Increase (Decrease)
In As % In As % In
Millions Net Sales Millions Net Sales Millions %
Gross profit $ 693.1 24.7 % $ 658.4 25.5 % $ 34.7 5.3 %
Gross profit increased $34.7 million or 5.3% in fiscal 2019 compared to fiscal
2018. Gross profit, as a percentage of net sales, decreased 80 basis points in
fiscal 2019 compared to fiscal 2018. The decrease in the gross profit margin was
primarily due to an increase in commodity costs, freight and tariffs of
approximately $60 million , which were offset by comparable increase in organic
volume and pricing, but still resulted in gross margin dilution. However, this
dilutive effect had reversed by our fourth quarter of fiscal 2019, due to a
decline in commodity costs. Gross profit, as a percentage of net sales, was also
negatively impacted by the opening balance sheet adjustment to Alpha inventories
of $7.2 million .
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Operating Items
Fiscal 2019 Fiscal 2018 Increase (Decrease)
In As % In As % In
Millions Net Sales Millions Net Sales Millions %
Operating expenses $ 441.4 15.7 % $ 382.1 14.8 % $ 59.3 15.5 %
Restructuring and
other exit charges 34.8 1.2 5.5 0.2 29.3 NM
Legal proceedings
charge, net 4.4 0.2 - - 4.4 NM
NM = not meaningful
Operating Expenses
Operating expenses increased $59.3 million or 15.5% in fiscal 2019 from fiscal
2018 and increased as a percentage of net sales by 90 basis points. The impact
of foreign currency translation resulted in a decrease of $8.5 million .
Excluding the impact of the foreign currency translation, the increase in
dollars was primarily due to Alpha acquisition related costs and payroll related
expenses.
Selling expenses, our main component of operating expenses, were 46.4% in fiscal 2019, compared to 51.5% in fiscal 2018.
Restructuring and other exit charges
With the recent Alpha acquisition, the Company commenced restructuring in the
Included in our fiscal 2019 operating results were restructuring and exit charges of$4.0 million inAmericas ,$27.0 million in EMEA and$3.8 million inAsia . Of the$27.0 million charges in EMEA,$17.7 million related to the closure of our facility in Targovishte,Bulgaria ,$4.9 million related to the disposition of GAZ Geräte - undAkkumulatorenwerk Zwickau GmbH , a wholly-owned German subsidiary,$3.4 million related to improving efficiencies of our general operations and$1.0 million related to dissolving a joint venture inTunisia . The facility inBulgaria produced diesel-electric submarine batteries. Management determined that the future demand for batteries of diesel-electric submarines was not sufficient given the number of competitors in the market. The$17.7 million charges were primarily non-cash charges of$15.0 million related to the write-off of fixed assets and$2.7 million of severance payments. In addition, cost of goods sold also included a$2.5 million of inventory write-off relating to the closure of theBulgaria facility. These exit activities were a consequence of the Company's strategic decision to streamline its product portfolio and focus its efforts on new technologies. The charges inAsia primarily related to improving efficiencies in the PRC in light of recent decline in demand. Included in our fiscal 2018 operating results is a$5.5 million charge of restructuring and other exit charges, comprising$1.3 million inAmericas ,$4.0 million in EMEA and$0.2 million inAsia . The charges in theAmericas primarily related to improving efficiencies of our general operations, while charges in EMEA related to restructuring programs to improve efficiencies in our manufacturing, supply chain and general operations. In addition, cost of goods sold also included a$3.4 million of inventory write-off relating to the closing of ourCleveland, Ohio charger manufacturing facility.
Legal proceedings charge (settlement income)
European Competition Investigations
Certain of our European subsidiaries had received subpoenas and requests for documents and, in some cases, interviews from, and have had on-site inspections conducted by the competition authorities ofBelgium ,Germany andthe Netherlands relating to conduct and anticompetitive practices of certain industrial battery participants. We settled the Belgian regulatory proceeding inFebruary 2016 by acknowledging certain anticompetitive practices and conduct and agreeing to pay a fine of$2.0 million , which was paid inMarch 2016 . During fiscal 2019, the Company paid$2.4 million towards certain aspects of this matter, which are under appeal. As ofMarch 31, 2019 andMarch 31, 2018 , the Company had a reserve balance of$0 million and$2.3 million , respectively. 42
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InJune 2017 , the Company settled a portion of its previously disclosed proceeding involving the German competition authority relating to conduct involving the Company's motive power battery business and agreed to pay a fine of$14.8 million , which was paid inJuly 2017 . Also inJune 2017 , the German competition authority issued a fining decision related to the Company's reserve power battery business, which constitutes the remaining portion of the previously disclosed German proceeding. The Company appealed this decision. InMarch 2019 , the Company settled this matter by agreeing to pay$7.3 million , which was paid inApril 2019 . As ofMarch 31, 2019 andMarch 31, 2018 , the Company had a reserve balance of$7.3 million and$0 , respectively. For the Dutch regulatory proceeding, we reserved$10.2 million as ofMarch 31, 2017 . InJuly 2017 , the Company settled the Dutch regulatory proceeding and agreed to pay a fine of$11.2 million , which was paid inAugust 2017 . As ofMarch 31, 2019 andMarch 31, 2018 , the Company had a reserve balance of$0 and$10.2 million , respectively, relating to the Dutch regulatory proceeding. As ofMarch 31, 2019 andMarch 31, 2018 , we had a total reserve balance of$7.3 million and$2.3 million , respectively, in connection with these remaining investigations and other related legal matters, included in Accrued Expenses on the Consolidated Balance Sheets. The foregoing estimate of losses is based upon currently available information for these proceedings. However, the precise scope, timing and time period at issue, as well as the final outcome of the investigations or customer claims, remain uncertain. Accordingly, the Company's estimate may change from time to time, and actual losses could vary.
EnerSys Sarl Litigation
One of the parties to a litigation related to a 1999 fire in a French hotel under construction involving the Company's French subsidiary, EnerSys Sarl, which was acquired by the Company in 2002, that was adverse to the Company, appealed the ruling by theCourt of Appeal of Lyon onJune 11, 2013 , which ruled in the Company's favor, entitling the Company to a refund of the monies paid of €2.0 million, or$2.8 million to theFrench Supreme Court , which appeal was denied inJanuary 2015 . During the third quarter of fiscal 2019, the Company and the adverse party settled this final item with the Company receiving a refund, including interest, from the adverse party of €2.5 million, or$2.8 million , for monies paid. The Company believes that it has no further liability with respect to this matter. Operating Earnings
Operating earnings by segment were as follows:
Fiscal 2019 Fiscal 2018 Increase (Decrease)
In As % In As % In
Millions Net Sales(1) Millions (2) Net Sales(1) Millions %
Americas $ 186.9 11.0 % $ 189.4 13.3 % $ (2.5 ) (1.4 )%
EMEA 71.9 8.4 77.7 9.1 (5.8 ) (7.3 )
Asia 3.2 1.3 12.6 4.2 (9.4 ) (74.6 )
Subtotal 262.0 9.3 279.7 10.8 (17.7 ) (6.4 )
Inventory adjustment
relating to exit
activities - Americas (7.2 ) (0.4 ) (3.4 ) (0.2 ) (3.8 ) NM
Restructuring charges -
Americas (4.0 ) (0.2 ) (1.3 ) (0.1 ) (2.7 ) NM
Inventory adjustment
relating to exit
activities - EMEA (2.6 ) (0.3 ) - - (2.6 ) NM
Restructuring and other
exit charges - EMEA (27.0 ) (3.1 ) (4.0 ) (0.5 ) (23.0 ) NM
Inventory adjustment
relating to exit
activities - Asia (0.5 ) (0.2 ) - - (0.5 ) NM
Restructuring charges -
Asia (3.8 ) (1.4 ) (0.2 ) (0.1 ) (3.6 ) NM
Legal proceedings
charge - EMEA (4.4 ) (0.5 ) - - (4.4 ) NM
Total operating
earnings $ 212.5 7.6 % $ 270.8 10.5 % $ (58.3 ) (21.5 )%
NM = not meaningful (1) The percentages shown for the segments are computed as a percentage of the
applicable segment's net sales.
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(2) Restated for ASU No. 2017-07, "Compensation-Retirement Benefits (Topic
715)". See Note 1 to the Consolidated Financial Statement for more details.
Operating earnings decreased$58.3 million or 21.5% in fiscal 2019, compared to fiscal 2018. Operating earnings, as a percentage of net sales, decreased 290 basis points in fiscal 2019, compared to fiscal 2018. Excluding the impact of highlighted items, operating earnings in fiscal 2019 decreased 150 basis points primarily due to an increase in commodity costs, freight and tariffs, although offset by organic volume improvement and price recoveries, caused a dilutive effect along with higher operating expense. TheAmericas segment's operating earnings, decreased$2.5 million or 1.4% in fiscal 2019 compared to fiscal 2018, with the operating margin decreasing 230 basis points to 11.0%. This decrease was primarily due to higher commodity costs, transaction costs related to the Alpha acquisition and product delays caused by ERP execution challenges, partially offset by organic volume improvement, price recoveries and cost saving initiatives. The EMEA segment's operating earnings, decreased$5.8 million or 7.3% in fiscal 2019 compared to fiscal 2018, with the operating margin decreasing 70 basis points to 8.4%. This decrease was primarily due to higher commodity costs and freight, partially offset by organic volume improvement and cost saving initiatives. Operating earnings inAsia , decreased$9.4 million or 74.6% in fiscal 2019 compared to fiscal 2018, with the operating margin decreasing by 290 basis points to 1.3%. This was primarily due to a decrease in organic volume from a slow down in telecom spending in the PRC and a general softening of demand inAustralia as well as higher commodity costs, in the first half of fiscal 2019 in the PRC. Interest Expense Fiscal 2019 Fiscal 2018 Increase (Decrease) In As % In As % In Millions Net Sales Millions Net Sales Millions %
Interest expense$ 30.9 1.1 %$ 25.0 1.0 %$ 5.9 23.5 % Interest expense of$30.9 million in fiscal 2019 (net of interest income of$2.1 million ) was$5.9 million higher than the$25.0 million in fiscal 2018 (net of interest income of$3.0 million ). Our average debt outstanding was$742.0 million in fiscal 2019, compared to our average debt outstanding of$672.8 million in fiscal 2018. Our average cash interest rate incurred in fiscal 2019 was 4.1% compared to 3.7% in fiscal 2018. The increase in interest expense was primarily due to higher interest rates and higher average debt. The increased borrowings was primarily to fund the Alpha acquisition.
Included in interest expense were non-cash charges related to amortization of
deferred financing fees of
Other (Income) Expense, Net
Fiscal 2019 Fiscal 2018 Increase (Decrease)
In As % In As % In
Millions Net Sales Millions Net Sales Millions %Other (income) expense, net$ (0.5 ) - %$ 7.5 0.3 %$ (8.0 ) NM NM = not meaningful Other (income) expense, net was income of$0.5 million in fiscal 2019 compared to expense of$7.5 million in fiscal 2018 primarily due to foreign currency gains of$3.1 million in fiscal 2019 compared to foreign currency losses of$5.5 million in fiscal 2018. 44
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Earnings Before Income Taxes
Fiscal 2019 Fiscal 2018 Increase (Decrease)
In As % In As % In
Millions Net Sales Millions Net Sales Millions %
Earnings before
income taxes $ 182.1 6.5 % $ 238.3 9.2 % $ (56.2 ) (23.5 )%
As a result of the factors discussed above, fiscal 2019 earnings before income
taxes were
Income Tax Expense
Fiscal 2019 Fiscal 2018 Increase (Decrease)
In As % In As % In
Millions Net Sales Millions Net Sales Millions %
Income tax expense $ 21.6 0.8 % $ 118.5 4.6 % $ (96.9 ) (81.8 )%
Effective tax rate 11.9 % 49.7 % (37.8 )%
Our effective income tax rate with respect to any period may be volatile based
on the mix of income in the tax jurisdictions in which we operate and the amount
of our consolidated income before taxes.
On December 22, 2017 , the Tax Cuts and Jobs Act ("Tax Act") was enacted into
law. Among the significant changes resulting from the law, the Tax Act reduced
the U.S. federal income tax rate from 35% to 21% effective January 1, 2018 , and
required companies to pay a one-time transition tax on unrepatriated cumulative
non-U.S. earnings of foreign subsidiaries and created new taxes on certain
foreign sourced earnings. The U.S. federal statutory tax rate for fiscal 2019 is
21.0%.
On December 22, 2017 , the SEC issued Staff Accounting Bulletin No.118 ("SAB
118") that provided guidance on the financial statement implications of the Tax
Act. In fiscal 2018, we recorded a provisional amount for the Transition Tax
liability, resulting in an increase in income tax expense of $97.5 million . In
fiscal 2019, we completed our accounting for the tax effects of enactment of the
Tax Act and recognized an income tax benefit of $13.5 million , net of uncertain
tax positions, resulting from a decrease in the mandatory one-time transition
tax on unremitted earnings of our foreign business. We made the election on the
2017 Federal Income Tax Return to pay the one-time Tax Act liability over an
eight-year period without interest, as allowed under the tax enactment.
The Company's income tax provision consists of federal, state and foreign income
taxes. The effective income tax rate was 11.9% in fiscal 2019 compared to the
fiscal 2018 effective income tax rate of 49.7%. The rate decrease in fiscal 2019
compared to fiscal 2018 is primarily due to the impact of the Tax Act, partially
offset by increases for additional tax valuation allowances related to certain
of our foreign subsidiaries, increases due to non-deductible legal proceedings
charge related to the European competition investigation and changes in the mix
of earnings among tax jurisdictions in fiscal 2019.
The fiscal 2019 foreign effective income tax rate was 12.3% on foreign pre-tax
income of $128.9 million compared to effective income tax rate of 5.2% on
foreign pre-tax income of $163.9 million in fiscal 2018. For both fiscal 2019
and 2018, the difference in the foreign effective tax rate versus the U.S.
statutory rate of 21% and 31.55%, respectively, is primarily attributable to
lower tax rates in the foreign countries in which we operate. The rate increase
in fiscal 2019 compared to fiscal 2018 is primarily due to additional tax
valuation allowances related to certain of our foreign subsidiaries, increases
due to non-deductible legal proceedings charge related to the European
competition investigation and changes in the mix of earnings among tax
jurisdictions in fiscal 2019.
Income from our Swiss subsidiary comprised a substantial portion of our overall
foreign mix of income for both fiscal 2019 and fiscal 2018 and is taxed at an
effective income tax rate of approximately 4% and 8%, respectively.
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Liquidity and Capital Resources
Cash Flow and Financing Activities
Cash and cash equivalents at
Cash provided by operating activities for fiscal 2020, 2019 and 2018, was
During fiscal 2020, cash provided by operating activities was primarily from net earnings of$137.1 million , depreciation and amortization of$87.3 million , non-cash charges relating to impairment of goodwill and other intangible assets of$44.2 million , restructuring, exit and other charges of$11.0 million , stock-based compensation of$20.8 million , provision for bad debts of$4.8 million and non-cash interest of$1.7 million , partially offset by deferred taxes of$16.5 million primarily from the Swiss Tax Reform. Cash provided by earnings adjusted for non-cash items were partially offset by the increase in primary working capital of$16.4 million , net of currency translation changes. Accrued expenses increased by$7.1 million , primarily due to payroll accruals of$8.6 million , sales incentives of$8.0 million , interest of$3.9 million , partially offset by payments of$7.3 million related to the German competition authority matter and$6.1 million paid to the seller in connection with the Alpha acquisition, for certain reimbursable pre-acquisition items. Prepaid and other current assets increased by$17.5 million , primarily due to contract assets of$11.1 million , insurance receivable of$22.0 million relating to theRichmond plant claim, partially offset by insurance proceeds of$12.0 million and the receipt of$4.1 million in connection with the Alpha transaction. Other liabilities decreased by$12.7 million due to income taxes. During fiscal 2019, cash provided by operating activities was primarily from net earnings of$160.5 million , depreciation and amortization of$63.3 million , non-cash charges relating to write-off of assets of$26.3 million , stock-based compensation of$22.6 million , non-cash interest of$1.3 million and provision for bad debts accounts of$1.4 million , partially offset by deferred tax benefit of$6.5 million . Cash provided by earnings as adjusted for non-cash items was partially offset by the increase in primary working capital of$30.7 million , net of currency translation changes, and a decrease in other long-term liabilities of$14.9 million , primarily related to income taxes. Prepaid and other current assets, primarily comprising of contract assets, also resulted in a decrease of$20.2 million to operating cash. During fiscal 2018, cash provided by operating activities was primarily from net earnings of$119.8 million , depreciation and amortization of$54.3 million , stock-based compensation of$19.5 million , non-cash charges relating to write-off of assets of$3.7 million , non-cash interest of$1.6 million and provision for bad debts of$0.8 million , partially offset by deferred tax benefit of$20.3 million . Cash provided by earnings as adjusted for non-cash items was improved by an increase of$94.0 million in long term liabilities primarily due to the Transition Tax liability and was partially offset by the increase in primary working capital of$49.0 million , net of currency translation changes, and a decrease in accrued expenses of$26.6 million , comprising primarily of legal proceedings related payments, payroll related expenses and income taxes. Prepaid and other current assets, comprising of prepaid taxes, also provided an increase of$14.5 million to operating cash. As explained in the discussion of our use of "non-GAAP financial measures," we monitor the level and percentage of primary working capital to sales. Primary working capital for this purpose is trade accounts receivable, plus inventories, minus trade accounts payable and the resulting net amount is divided by the trailing three-month net sales (annualized) to derive a primary working capital percentage. Primary working capital was$833.5 million (yielding a primary working capital percentage of 26.7%) atMarch 31, 2020 and$835.6 million (yielding a primary working capital percentage of 26.2%) atMarch 31, 2019 . The primary working capital percentage of 26.7% atMarch 31, 2020 is 50 basis points higher than that forMarch 31, 2019 , and 100 basis points higher than that forMarch 31, 2018 . The primary working capital dollars are consistent with prior year. The increase in fiscal 2019 compared to fiscal 2018, was primarily due to the inclusion of the Alpha acquisition and higher inventory levels. 46
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Primary
Primary Quarter Working
Balance at March 31, Trade Accounts Working Revenue Capital
(1) (2) (3) Receivables Inventory Payable Capital Annualized (%)
(in millions)
2020 $ 595.9 $ 519.5 $ (281.9 ) $ 833.5 $ 3,127.2 26.7 %
2019 624.1 503.9 (292.4 ) 835.6 3,186.4 26.2
2018 546.3 414.2 (258.9 ) 701.6 2,732.2 25.7
(1) The Company acquired NorthStar on September 30, 2019 , as disclosed in Note 4
to the Consolidated Financial Statements. Therefore, the Primary working capital
and related calculations as of March 31, 2018 and March 31, 2019 did not include
NorthStar's primary working capital and its components.
(2) The Company acquired Alpha on December 7, 2018 , as disclosed in Note 4 to
the Consolidated Financial Statements. Therefore, the Primary working capital
and related calculations as of March 31, 2018 did not include Alpha's primary
working capital and its components.
(3) The inclusion of the NorthStar from its respective date of acquisition did
not have a material impact on the Company's consolidated Primary working capital
as of March 31, 2020 .
Cash used in investing activities for fiscal 2020, 2019 and 2018 was
During fiscal 2020 we acquired NorthStar for
During fiscal 2019, we acquired Alpha for a total purchase consideration of$742.5 million , of which$650.0 was paid in cash and the balance, after adjusting for working capital of$0.8 million due from seller, was settled by issuing 1,177,630 shares ofEnerSys common stock at a closing date fair value of$93.3 million . See Note 4 to the Consolidated Financial Statements for more details.
In fiscal 2019 and 2018, we also had minor acquisitions resulting in a cash
outflow of
Capital expenditures were
During fiscal 2020, financing activities provided cash of$62.7 million . We issued our 2027 Notes for$300 million , the proceeds of which were utilized to pay down the existing revolver borrowings. We borrowed$386.7 million under the Amended 2017 Revolver and repaid$517.7 million of the Amended 2017 Revolver. Repayment on the Amended 2017 Term Loan was$28.1 million and net payments on short-term debt were$5.3 million .Treasury stock open market purchases were$34.6 million , payment of cash dividends to our stockholders were$29.7 million and payment of taxes related to net share settlement of equity awards were$6.4 million . During fiscal 2019, financing activities provided cash of$346.6 million . We borrowed$531.1 million under the Amended 2017 Revolver and$299.1 million under the Amended 2017 Term Loan, primarily to fund the Alpha acquisition and repaid$427.6 million of the Amended 2017 Revolver and$11.7 million on the Amended 2017 Term Loan.Treasury stock open market purchases were$56.4 million , payment of cash dividends to our stockholders were$29.7 million and payment of taxes related to net share settlement of equity awards were$3.6 million . Proceeds from stock options were$9.0 million and net borrowings on short-term debt were$37.4 million . During fiscal 2018, financing activities used cash of$166.9 million . In fiscal 2018, we entered into a 2017 Credit Facility and borrowed$379.8 million under the 2017 Revolver and$150.0 million under the 2017 Term loan. Repayments on the 2017 Revolver during fiscal 2018 were$244.3 million . Borrowings and repayments on the 2011 Revolver during fiscal 2018 were$147.1 million and$312.1 million , respectively, and repayment of the 2011 Term loan was$127.5 million . OnAugust 4, 2017 , the outstanding balance on the 2011 Revolver and the 2011 Term Loan of$240.0 million and$123.0 million , respectively, was repaid utilizing the proceeds from the 2017 Credit Facility. We also paid$100.0 million under the ASR agreement, which was settled onJanuary 9, 2018 .Treasury stock open market purchases were$21.2 million , payment of cash dividends to our stockholders were$29.7 million , payment of taxes related to net share settlement of equity awards were$7.5 million and debt issuance costs were$2.7 million . Net borrowings on short-term debt were$0.2 million and proceeds from stock options were$1.0 million . 47
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As a result of the above, total cash and cash equivalents increased by$27.8 million from$299.2 million atMarch 31, 2019 to$327.0 million atMarch 31, 2020 . In addition to cash flows from operating activities, we had available committed and uncommitted credit lines of approximately$694 million atMarch 31, 2020 to cover short-term liquidity requirements. Our Amended Credit Facility is committed throughSeptember 30, 2022 , as long as we continue to comply with the covenants and conditions of the credit facility agreement. We have$587 million in available credit lines under our Amended Credit Facility atMarch 31, 2020 .
Compliance with Debt Covenants
All obligations under our Amended Credit Facility are secured by, among other things, substantially all of ourU.S. assets. The Amended Credit Facility contains various covenants which, absent prepayment in full of the indebtedness and other obligations, or the receipt of waivers, limit our ability to conduct certain specified business transactions, buy or sell assets out of the ordinary course of business, engage in sale and leaseback transactions, pay dividends and take certain other actions. There are no prepayment penalties on loans under this credit facility. We are in compliance with all covenants and conditions under our Amended Credit Facility and Senior Notes. We believe that we will continue to comply with these covenants and conditions, and that we have the financial resources and the capital available to fund the foreseeable organic growth in our business and to remain active in pursuing further acquisition opportunities. See Note 10 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements during any of the periods covered by this report.
Contractual Obligations and Commercial Commitments
AtMarch 31, 2020 , we had certain cash obligations, which are due as follows: Less than 2 to 3 4 to 5 After Total 1 year years years 5 years (in millions) Debt obligations$ 1,113.2 $ 38.9 $ 474.3 $ 300.0 $ 300.0 Short-term debt 46.5 46.5 - - - Interest on debt 186.3 41.2 72.0 33.8 39.3 Operating leases 84.1 24.6 32.4 14.0 13.1 Tax Act - Transition Tax 64.8 6.2 12.3 27.0 19.3 Pension benefit payments and profit sharing 36.2 2.8 6.0 7.0 20.4 Restructuring 3.3 3.3 - - - Purchase commitments 10.7 10.7 - - - Lead and foreign currency forward contracts 3.2 3.2 - - - Finance lease obligations, including interest 0.6 0.2 0.3 0.1 - Total$ 1,548.9 $ 177.6 $ 597.3 $ 381.9 $ 392.1
Due to the uncertainty of future cash outflows, uncertain tax positions have been excluded from the above table.
Under our Amended Credit Facility and other credit arrangements, we had
outstanding standby letters of credit of
Credit Facilities and Leverage
Our focus on working capital management and cash flow from operations is measured by our ability to reduce debt and reduce our leverage ratios.
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In the third quarter of fiscal 2020, we issued
In the second quarter of fiscal 2018, we entered into the 2017 Credit Facility that comprised a$600.0 million senior secured revolving credit facility ("2017 Revolver") and a$150.0 million senior secured term loan ("2017 Term Loan") with a maturity date ofSeptember 30, 2022 . We repaid our then existing facility ("2011 Credit Facility"), which comprised a$500 million senior secured revolving credit facility ("2011 Revolver") and a$150.0 million senior secured incremental term loan (the "2011 Term Loan") with the proceeds from the 2017 Credit facility. OnDecember 7, 2018 , we amended the 2017 Credit Facility (as amended, the "Amended Credit Facility"). The Amended Credit Facility consists of$449.1 million senior secured term loans (the "Amended 2017 Term Loan"), including aCAD 133.1 million ($99.1 million ) term loan and a$700.0 million senior secured revolving credit facility (the "Amended 2017 Revolver"). The amendment resulted in an increase of the 2017 Term Loan and the 2017 Revolver by$299.1 million and$100.0 million , respectively.
Shown below are the leverage ratios at
The total net debt, as defined under the Amended Credit Facility is$905.6 million for fiscal 2020 and is 2.3 times adjusted EBITDA (non-GAAP), compared to total net debt of$835.8 million and 2.0 times adjusted EBITDA (non-GAAP) for fiscal 2019.
The following table provides a reconciliation of net earnings to EBITDA
(non-GAAP) and adjusted EBITDA (non-GAAP) for
Fiscal 2020 Fiscal 2019
(in millions, except ratios)
Net earnings as reported $ 137.1 $ 160.5
Add back:
Depreciation and amortization 87.3 63.3
Interest expense 43.7 30.9
Income tax expense 9.9 21.6
EBITDA (non GAAP)(1) $ 278.0 $ 276.3
Adjustments per credit agreement definitions(2) 123.6 139.0
Adjusted EBITDA (non-GAAP) per credit agreement(1) $ 401.6 $ 415.3
Total net debt(3) $ 905.6 $ 835.8 Leverage ratios(4):
Total net debt/adjusted EBITDA ratio(4) 2.3 X 2.0 X
Maximum ratio permitted 3.5 X 4.0 X
Consolidated interest coverage ratio(5) 9.1X 9.9 X Minimum ratio required 3.0 X 3.0 X
(1) We have included EBITDA (non-GAAP) and adjusted EBITDA (non-GAAP) because
our lenders use them as key measures of our performance. EBITDA is defined
as earnings before interest expense, income tax expense, depreciation and
amortization. EBITDA is not a measure of financial performance under GAAP
and should not be considered an alternative to net earnings or any other
measure of performance under GAAP or to cash flows from operating,
investing or financing activities as an indicator of cash flows or as a
measure of liquidity. Our calculation of EBITDA may be different from the
calculations used by other companies, and therefore comparability may be
limited. Certain financial covenants in our Amended Credit Facility arebased on EBITDA, subject to adjustments, which are shown above. Continued
availability of credit under our Amended Credit Facility is critical to our
ability to meet our business plans. We believe that an understanding of the
key terms of our credit agreement is important to an investor's
understanding of our financial condition and liquidity risks. Failure to
comply with our financial covenants, unless waived by our lenders, would
mean we could not borrow any further amounts under our revolving credit
facility and would give our lenders the right to demand immediate repayment
of all outstanding revolving credit and term loans. We would be unable to
continue our operations at current levels if we lost the liquidity provided
under our credit agreements. Depreciation and amortization in this table
excludes the amortization of deferred financing fees, which is included in
interest expense.
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(2) The
impairment of goodwill and other intangible assets of
million of non-cash stock compensation, inclusion of
months of pro forma earnings of NorthStar,
and other exit charges and
value step up relating to the NorthStar transaction),
reimbursement for business interruption due to the
other charges of
fiscal 2019 primarily related to the inclusion of
months of pro forma earnings of Alpha,
related to the Alpha transaction,
compensation,
charges and
step up relating to the Alpha transaction of
(3) Debt includes finance lease obligations and letters of credit and is net of
all
and investments, as defined in the Amended Credit Facility. In fiscal 2020,
the amounts deducted in the calculation of net debt were
equivalents and foreign cash investments of
2019, were $200 million .
(4) These ratios are included to show compliance with the leverage ratios set
forth in our credit facilities. We show both our current ratios and themaximum ratio permitted or minimum ratio required under our Amended Credit
Facility, for fiscal 2020 and fiscal 2019, respectively.
(5) As defined in the Amended Credit Facility, interest expense used in the
consolidated interest coverage ratio excludes non-cash interest of $1.7
million and
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements - Summary of Significant
Accounting Policies for a description of certain recently issued accounting
standards that were adopted or are pending adoption that could have a
significant impact on our Consolidated Financial Statements or the Notes to the
Consolidated Financial Statements.
Related Party Transactions
None.
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Sequential Quarterly Information
Fiscal 2020 and 2019 quarterly operating results, and the associated quarterly trends within each of those two fiscal years, are affected by the same economic and business conditions except for impairment charges relating to goodwill inAsia of$39.7 million and trademarks in EMEA of$4.5 million in the fourth quarter of fiscal 2020 (as discussed in Results of Operations - Fiscal 2020 Compared to Fiscal 2019 in Item 7), income tax benefit of$21.0 million in the second quarter of fiscal 2020, on account of the Swiss tax reform and a tax benefit of$13.5 million in the third quarter of fiscal 2019 as a result of the Tax Act. We have also included the operating results of NorthStar, in our third and fourth quarter results, for the period commencing onSeptember 30, 2019 (the date of acquisition) and ending onMarch 31, 2020 . NorthStar's sales for the third and fourth quarters of fiscal 2020 were$27.8 million and$26.7 million , respectively while net loss, for the same periods were$13.5 million and$0.5 million , respectively. We have also included the operating results of Alpha, in our third and fourth quarter results, for the period commencing onDecember 7, 2018 (the date of acquisition) and ending onMarch 31, 2019 . The sales for the third and fourth quarters of fiscal 2019 were$26.8 million and$135.7 million , respectively. Alpha's net loss and net earnings, for the same periods were$4.4 million and$3.2 million , respectively. Fiscal 2020 Fiscal 2019 June 30, Sept. 29, Dec. 29, March 31, July 1, Sept. 30, Dec. 30, March 31, 2019 2019 2019 2020 2018 2018 2018 2019 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. (in millions, except share and per share amounts) Net sales$ 780.2 $ 762.1 $ 763.7 $ 781.8 $ 670.9 $ 660.5 $ 680.0 $ 796.6 Cost of goods sold 578.7 564.8 574.6 582.9 505.1 499.6 511.7 588.2 Inventory step up to fair value relating to acquisitions and exit activities - - 3.8 (1.9 ) 0.5 - 3.7 6.1 Gross profit 201.5 197.3 185.3 200.8 165.3 160.9 164.6 202.3 Operating expenses 130.8 132.3 132.8 133.8 99.3 96.5 112.0 133.6 Restructuring, exit and other charges 2.4 6.3 9.4 2.7 1.8 1.1 5.4 26.5 Impairment of goodwill - - - 39.7 - - - - Impairment of indefinite-lived intangibles - - - 4.5 - - - - Legal proceedings (settlement income) charge - - - - - - (2.8 ) 7.2 Operating earnings 68.3 58.7 43.1 20.1 64.2 63.3 50.0 35.0 Interest expense 10.9 10.1 11.1 11.6 6.5 6.4 7.1 10.9 Other (income) expense, net (1.2 ) 0.2 (0.6 ) 1.1 0.4 (1.3 ) - 0.4 Earnings before income taxes 58.6 48.4 32.6 7.4 57.3 58.2 42.9 23.7 Income tax expense (benefit) 10.0 (14.3 ) 5.3 8.9 11.3 10.8 (5.7 ) 5.2 Net earnings (loss) 48.6 62.7 27.3 (1.5 ) 46.0 47.4 48.6 18.5 Net earnings attributable to noncontrolling interests - - - - 0.1 - 0.2 - Net earnings (loss) attributable to EnerSys stockholders$ 48.6 $ 62.7 $ 27.3 $ (1.5 ) $ 45.9 $ 47.4 $ 48.4 $ 18.5 Net earnings (loss) per common share attributable to EnerSys stockholders: Basic$ 1.14 $ 1.48 $ 0.65 $ (0.04 ) $ 1.09 $ 1.13 $ 1.14 $ 0.43 Diluted$ 1.13 $ 1.47 $ 0.64 $ (0.04 ) $ 1.08 $ 1.11 $ 1.12 $ 0.42 Weighted-average number of common shares outstanding: Basic 42,656,339 42,392,039 42,286,641 42,312,315 42,012,546 42,133,484 42,337,459 42,856,604 Diluted 43,118,434 42,708,082 42,838,969 42,312,315 42,573,981 42,773,706 43,102,598 43,585,523 51
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Quarterly net sales by segment were as follows:
Fiscal 2020 Fiscal 2019
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
(in millions)
Net sales by
segment:
Americas $ 517.1 $ 524.9 $ 503.1 $ 537.2 $ 392.5 $ 388.6 $ 402.0 $ 507.8
EMEA 203.2 182.8 202.3 199.0 210.5 204.0 217.8 228.3
Asia 59.9 54.4 58.3 45.6 67.9 67.9 60.2 60.5
Total $ 780.2 $ 762.1 $ 763.7 $ 781.8 $ 670.9 $ 660.5 $ 680.0 $ 796.6
Segment net
sales as % of
total:
Americas 66.3 % 68.9 % 65.9 % 68.7 % 58.5 % 58.8 % 59.1 % 63.7 %
EMEA 26.0 24.0 26.5 25.5 31.4 30.9 32.0 28.7
Asia 7.7 7.1 7.6 5.8 10.1 10.3 8.9 7.6
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Quarterly net sales by product line were as follows:
Fiscal 2020 Fiscal 2019
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
(in millions)
Net sales by
product line:
Reserve power $ 435.8 $ 426.8 $ 448.2 $ 428.8 $ 324.0 $ 313.4 $ 329.5 $ 449.3
Motive power 344.4 335.3 315.5 353.0 346.9 347.1 350.5 347.3
Total $ 780.2 $ 762.1 $ 763.7 $ 781.8 $ 670.9 $ 660.5 $ 680.0 $ 796.6
Product line net
sales as % of
total:
Reserve power 55.9 % 56.0 % 58.7 % 54.9 % 48.3 % 47.4 % 48.5 % 56.4 %
Motive power 44.1 44.0 41.3 45.1 51.7 52.6 51.5 43.6
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %© Edgar Online, source
